All About The Deficit

We got a big deal on the budget Friday, a two-year deal that increases federal spending by hundreds of billions of dollars for the military and domestic programs, as well as disaster relief. It also suspends the debt ceiling that is lifting the federal borrowing limit through March 2019. After months of lurching from one short fix to another, the measure brings a level of stability to funding the government. But at what cost? We may now see a return to trillion-dollar annual deficits. Here to walk through all this is NPR's White House correspondent Scott Horsley. Hi.

SCOTT HORSLEY, BYLINE: Hi. Good to be with you.

GARCIA-NAVARRO: OK. So how is this money going to be spent? Both Democrats and Republicans got funding for programs they traditionally care about.

HORSLEY: That's right. The president was insistent on getting more money for the military. And this deal boosts military spending by about $80 billion this year, 85 billion next year. Many Democrats also want to see more money for the military, but they wanted money for domestic programs in addition to that. So this deal includes about 65 billion in additional domestic spending this year and 68 billion next year.

GARCIA-NAVARRO: And this deal sets aside the debt ceiling for a year, which has been at the center of so many high-stakes political fights.

HORSLEY: Yeah. The debt ceiling is kind of a dangerous tripwire in the U.S. government. It does nothing to control what the government spends. It only affects the government's ability to pay it back. And everyone who does business with the U.S. government fully expects to get paid. So even hinting that the government might welsh on its debts is dangerous. In this case, Congress has put that off for another year.

GARCIA-NAVARRO: We're likely to see increases in our annual deficits now. But what does that mean for the economy in real terms?

HORSLEY: Well, keep in mind, Lulu, two things are happening. One is the government's going to be spending more money as a result of this deal both on the military side and the domestic side. It's also going to be taking in less money thanks to that big tax cut that the president signed back in December. So, initially, that means there's going to be more money left out there in the economy sloshing around, which could give a temporary boost to economic growth. But it also means the government's going to have to borrow more money, and that could be costly, especially if the Federal Reserve decides to hike interest rates more rapidly, potentially slowing economic growth.

GARCIA-NAVARRO: OK. Bigger deficits mean a bigger debt, as you mention. But what are the actual costs?

HORSLEY: Yeah. The deficit - you can think about that - that's just a gap between what the government spends and what it takes in. So if you outspend your paychecks a month, you might put the difference on your credit card. The government does the same. That's the deficit. The debt is like the accumulated credit card balance, the sum of all the deficits you've run in the previous months or years.

So the bigger that balance on the government's credit card, the more the government has to pay in interest costs. And that means it's got less money available to spend on everything else we want the government to do. What's more, if the government's borrowing a whole lot of money, that potentially means there's less money available for individuals and businesses that want to borrow. And that can have the effect of curbing economic growth. Economists call that the crowding out effect.

GARCIA-NAVARRO: This was a huge issue for Republicans, and they seem now to have backed off of that.

HORSLEY: Yeah. Some of the Republicans who used to sound the alarm about rising deficits during the Obama administration seem less concerned about that now. I'm not sure if that's because they've gotten some new economic theory. It may have more to do just with who's in charge. During the recession, we saw dire warnings about debt-to-GDP ratios. Those turned out not to be true. A better question might be, you know, what are we running up the debt for?

During World War II, the country ran huge deficits, and I think history generally considers that money well spent to preserve democracy, defeat the Nazis. We'll see how history judges deficit spending now to provide tax cuts and boost government spending in an economy that's already close to full employment.

GARCIA-NAVARRO: That is NPR's White House correspondent Scott Horsley. Thanks so much.

HORSLEY: Good to be with you. Transcript provided by NPR, Copyright NPR.